Standard & Poor's Ratings Services said that it lowered its long-term corporate credit rating on United Arab Emirates-based district cooling company National Central Cooling Co. PJSC (Tabreed) to 'BB-' from 'BB'. At the same time, the rating was placed on CreditWatch
with negative implications.

In addition, the debt rating on the senior secured sukuk certificates due 2011 issued by Tabreed 06 Financing Corp. was also lowered to 'BB-' from 'BB', and the debt rating on the subordinated convertible sukuk certificates due 2011 issued by Tabreed 08 Financing Corp. was lowered to 'B-' from 'B'.

"The downgrade reflects the lowering of our assessment of Tabreed's stand-alone credit profile (SACP)," said Standard & Poor's credit analyst Karim Nassif. "The CreditWatch placement primarily reflects our view of Tabreed's tightening liquidity position during the remainder of 2009, despite our understanding of Mubadala's increasing influence over the company's operation in 2009, including facilitating year-to-date refinancings. Without this support, it is likely that Tabreed's SACP would be considerably weaker."

The weakening of Tabreed's SACP reflects the underperformance in the year to date compared with the company's guidance as set out in its December 2008 business plan. The major areas of underperformance were: lower-than-anticipated reported profitability of UAE dirham (AED) 47.2 million in the half year to June 30, 2009, compared with the guidance of AED70.6 million and the previous year's figure of AED49.5 million; and the company's failure to obtain the targeted AED1.0 billion proceeds from general asset sales including to various joint ventures. However, Tabreed has received capex reimbursement payments of AED400 million in the year to date.

In addition, the company faces a high ongoing exposure to refinancing risk through the rollover of various short-term banking facilities. While this rollover has been successfully undertaken in the year to date, the refinancing risk does leave Tabreed vulnerable to a further stress on its already weak liquidity position. This situation also illustrates our uncertainty as to the sustainability of the company's business model and capital structure.

The CreditWatch placement primarily reflects our view on the company's liquidity position in the remainder of 2009. Tabreed still plans a significant level of capex (up to AED600 million), needs to rollover a number of banking facilities, and continues to face the challenge of improving operating cash flow relative to capex.

The 'BB-' issuer credit rating on Tabreed is based on our opinion that, in accordance with our criteria for government-related entities, there is a "moderately high" likelihood that the government of the Emirate of Abu Dhabi (AA/Stable/A-1+) and/or its affiliates would provide timely and sufficient extraordinary support to Tabreed in the event of financial distress. We consider the company's SACP to be in the 'B' category.

The "moderately high" likelihood of extraordinary government support is based on our assessment of Tabreed's "important" role in providing district cooling as part of Abu Dhabi's infrastructure strategy set out in the Abu Dhabi 2030 plan; and its "strong" link with the Abu Dhabi government, such as through the 16.7% ownership of Tabreed by a 100% government-owned affiliate Mubadala Development Co PJSC (AA/Stable/A-1+).

"We will seek to resolve the CreditWatch placement within the next two to three months once we have a clearer understanding of the future business and financial plans for the company from 2010 onward," said Mr. Nassif.

In addition, we will continue to review the company's short-term liquidity position during the remainder of 2009, including Tabreed's level of success in securing new funding facilities as well as rolling over existing maturing debt.

We could lower the ratings, potentially by more than one notch, if the company does not provide a clear and sustainable business plan to counteract the liquidity challenge and improve levels of free cash flow.

The ratings could be revised to stable, or upgraded, if a sustainable and achievable revised business plan is brought forward or we consider that there is the potential for additional extraordinary government support, as a result, for example, of a strengthening of the company's link company to the emirate.